A-B InBev Mulls Distributor Consolidation

Brewer seeking way to sell half of U.S. beer volume directly to retailers

ST. LOUIS -- Anheuser-Busch InBev NV is looking into consolidating its network of independent U.S. beer distributorsperhaps by owning many more distributors itselfaccording to an analyst report cited by The Wall Street Journal that the newspaper said represents a potential blow for the beer titan's roughly 600 distributors.

Management at the maker of Budweiser and Stella Artois is studying the concept of someday selling as much as 50% of its U.S. beer volume directly to retailers through its own distributors, up from 7% today, according to the report Wednesday by [image-nocss] Melissa Earlam, a UBS analyst who recently met with company leaders.

Such a move would allow A-B InBev, the world's largest brewer by sales, to lower its costs and grab gross margins currently flowing to distributors, said the report. Even if the brewer does not pursue that path, the threat of such a shift could compel more of its independent distributors to merge, which would help lower the brewer's costs, Earlam wrote.

"At the least, we believe this is a powerful negotiating tool with distributors," she said, according to the Journal.

The report marks the first serious indication that the Leuven, Belgium-based brewer intends to put the squeeze on its distribution network to improve its own profitability, the report added. Potentially billions of dollars currently flowing to distributors could be at stake.

InBev rapidly has reduced costs at A-B since acquiring the company for $52 billion last fall. But its distributors so far mostly have been spared the knife.

In the United States, the majority of alcohol products are sold through distributors under a complex regulatory system erected after the repeal of Prohibition. State laws generally require that makers of alcoholic beverages sell them to distributors, which mark up the prices and ship the products to bars and stores, which then sell them to consumers.

A-B today has 13 distributors of its own in cities such as New York, Denver and San Diego, and could seek to acquire more of them as opportunities arose. But such ownership is not permitted in some states. Also, existing distributors enjoy certain legal and contractual protections that can make it difficult for alcohol producers to replace them, the report said.

Some retailers and producers have gone to court to challenge the so-called three-tier system in recent years, seeking to cut out distributors and conduct sales directly from suppliers to consumers or suppliers to retailers. Some efforts, most notably in the wine industry, have been successful, but in many cases courts have upheld state laws that require sales to go through distributors.

The UBS report suggests A-B intends to work within the existing regulatory systemrather than challenging itto explore consolidation. "At the time of the A-B acquisition...ABI had thought that 20% direct distribution was possible in the U.S. market," Earlam wrote. "ABI now believes in theory 50% of volumes could ultimately be sold through direct distribution."

The brewer's chief rival, MillerCoors LLC, has pushed for consolidation among its distributors since SABMiller PLC and Molson Coors Brewing Co. combined their U.S. units to form the joint venture last year; however, it has not tried to buy distributors itself. The process has sparked controversy and a number of lawsuits by distributors (click here for previous CSP Daily News coverage), but has resulted in a more consolidated network.

MillerCoors's distribution network is more streamlined than A-B's. For instance, in Indiana, A-B works with 20 distributors, while MillerCoors works with two.

Some industry observers, such as Credit Suisse analyst Carlos Laboy, have predicted that A-B eventually would try to overhaul its U.S. distribution model. "Wake up and smell the coffee," Laboy told distributors at industry newsletter Beer Business Daily's annual conference earlier this year, according to the Journal. "There are many family firms who have misestimated their vulnerability to ABI's wealth-creation agenda."